Basel-II norms pose a challenge, says KPMG official

Much like their global counterparts, Indian banks are well behind schedule for the implementation of Basel II, according to a survey of 252 financial entities across 36 countries by consulting firm KPMG.

"Indian banks trail leading global ones, and need to scale up their efforts in order to be ready for implementation 2007-08 onwards," said Russell Perera, head-financial services at KPMG.

The survey found that more than half the global banks were still busy with pre-studies on internal capital assessment processes and disclosures on capital, risk exposures and risk assessment processes.

The key obstacles are lack of data for operational risk assessment, high information technology needs and the cost of compliance. The banking industry globally is also facing a shortage of credit risk management experts, Perera said.

The Financial Services Authority (FSA) of the UK has estimated that it will need to spend £100-170 million if Basel II requires its information technology systems to be changed, said the Reserve Bank of India (RBI) general manager, Amrendra Mohan. Information technology accounts for about 60 per cent of FSA's budget.

He said banks in India do not consolidate the group entities for capital adequacy purposes. This will change with the advent of the new capital adequacy norms.

Apart from credit risk, the Basel II norms stipulate capital allocation for market risk and operational risk. Market risk is being currently captured through the requirement of creation of investment fluctuation reserve, while setting aside capital for operational risk is a new addition.